Considering first IP - is my rough estimate correct

[johk]

Hi,

We are considering buying a new house "of the plan" and rent our current Townhouse that we bought 2004/2005. One criteria for us is that we don’t want be more "out of pocket" than we currently are. We know that we would be able to get 590 p/w for rent as other townhouse in the estate are rented for that amount. The below is a very rough estimate but was wondering if I am close to the final figure.

PPOR:
Value: 590000
Mortgage: 370000
Body corp: $3200per year
Possible rental income: 590 p/w
Mortgage Repayments on PPOR: $1320 fortnightly

IP:
Value: 510000
No body corp

I have based the below on a 8% interest rate over 25 yrs

Mortgage on IP: 530000 - 176000(equity) = $334000
Mortgage repayments on IP: $1190 fortnightly

Total repayments: $2510 fortnightly
Total income from rent: $1180 fortnightly

Mortgage repayments with IP: $1330 fortnightly

Other expenses
Landlord insurance: $400 per year ?


Thanks,
Johk

 

[DaveM]

Managing agents fees?
Vacancy per annum (allow 2 weeks to be safe)
Letting fee per annum?
Repairs and maintenance fund?
Future capital expediture fund (eg put money aside for exterior painting, new gutters, new kitchen etc based on condition of property)
Landlord insurance on a 510k property will be more than $400 a year taking into account building/contents insurance package

 

[Peter_Tersteeg]

The banks only use 75% to 80% of the rental income for affordability purposes. The rest of it is assumed to cover the various holding costs which you're looking for.

It's not precise, but the rule of thumb does usually work fairly well.

 

[chilliblue]

Managing agents fees?
Vacancy per annum (allow 2 weeks to be safe)
Letting fee per annum?
Repairs and maintenance fund?
Future capital expediture fund (eg put money aside for exterior painting, new gutters, new kitchen etc based on condition of property)
Landlord insurance on a 510k property will be more than $400 a year taking into account building/contents insurance package

Council rates
Utility service charges

 

[Ed Barton]

Hi,

We are considering buying a new house "of the plan" and rent our current Townhouse that we bought 2004/2005. One criteria for us is that we don’t want be more "out of pocket" than we currently are. We know that we would be able to get 590 p/w for rent as other townhouse in the estate are rented for that amount. The below is a very rough estimate but was wondering if I am close to the final figure.

PPOR:
Value: 590000
Mortgage: 370000
Body corp: $3200per year
Possible rental income: 590 p/w
Mortgage Repayments on PPOR: $1320 fortnightly

IP:
Value: 510000
No body corp

I have based the below on a 8% interest rate over 25 yrs

Mortgage on IP: 530000 - 176000(equity) = $334000
Mortgage repayments on IP: $1190 fortnightly

Total repayments: $2510 fortnightly
Total income from rent: $1180 fortnightly

Mortgage repayments with IP: $1330 fortnightly

Other expenses
Landlord insurance: $400 per year ?


Thanks,
Johk

you need to get a new calculator. 530k- 176k does not equal 334k.

i find your post confusing. so you want to turn your current ppor townhouse into an ip?

your figures and terminology is all over the place.

 

[johk]

Hi,

Yes I would like to turn our current PPOR into IP as we would be able to get more rent from the PPOR than the house we are looking at.
Sorry if my figures are all of the place but I am trying to get an understanding on how to gauge if it is possible for us to purchase the house we are looking at and then rent out or current PPOR.

“530k- 176k does not equal 334k.” It is a typo it should be 510k-176k

Cheers,
Johk

 

[Rolf Latham]

Hi,

.

PPOR:
Value: 590000
Mortgage: 370000

Mortgage Repayments on PPOR: $1320 fortnightly

Hiya

This looks like ur "old" PPOR soon to be IP loan is Principal and Interest.

Sit with a decent mortgage broker and restructure this so its interest only, with 100 % IO offset, Unless you are a poor saver, in which case the PI will probably serve u better

ta

rolf

 

[johk]

We try again but a different scenario. We will keep the PPOR as PPOR and purchasing an IP. The IP is post ware house from about 1950’S which was fully renovated 3 yrs ago. I have not included purchasing cost such as stamp duty etc.


Our PPOR value: $600k
Loan amount:380k
Equity: 220K

IP Value: $465k
Deposit: 80% of equity = 176k
Loan Amount required :289k
Rent: 450p/w

Monthly expenses:
Interest only repayments at 8%:1927/mth
Strata: 200
Water: 150
Council:150
Maintenance: 200
Total expenses : 2627/mth -> 31524 per year
IP Cashflow:450x50 – 31524 = -9024

Assumed 50/50 ownership
Income 1: 80k - 4512 = 75488 ->Tax 16192
Income 2: 30k -4512 = 25488 -> Tax 2923

Out of pocket per mth
Tax without IP (income 1 + Income 2): 17550+3600 =21150
Tax with IP: 16192+2923 = 19115
Tax Return: 2035 -> 169.6/mth

Out of pocket per month = IP mortgage repayment – rent – tax return = 1927 – 1800 – 169.9 = -42.9

If I have done the calc’s correct above it means that I will be 43 out of pocket per month.

I forgot to add the property management cost to the above
I would really appreciate comments on if the above is close the “reality”.

Thanks,
J

 

[Ed Barton]

i'd definitely hold onto the townhouse if it's going up 10k every 3 days! then again your loan seems to be going up by the same amount. lol

Our PPOR value: $600k
Loan amount:380k
Equity: 220K

IP Value: $465k
Deposit: 80% of equity = 176k
Loan Amount required :289k
Rent: 450p/w

why is the IP deposit 80% of the equity in your PPOR? where is this money coming from? do you have it in a savings account? if so, best to pay 176k off the ppor loan and borrow 100% for the IP.

edit - I'm going make a wild assumption here. you've heard people say 'use the equity in your ppor to fund the deposit on an ip'. yes? well it's not free money unfortunately or I'd be a billionaire. the more correct saying would be 'use the equity in your ppor as security for an ip to allow you to purchase it with no savings at 100% of purchase price'.

 

[gottabespotless]

We try again but a different scenario. We will keep the PPOR as PPOR and purchasing an IP. The IP is post ware house from about 1950’S which was fully renovated 3 yrs ago. I have not included purchasing cost such as stamp duty etc.


Our PPOR value: $600k
Loan amount:380k
Equity: 220K

IP Value: $465k
Deposit: 80% of equity = 176k
Loan Amount required :289k
Rent: 450p/w

Monthly expenses:
Interest only repayments at 8%:1927/mth
Strata: 200
Water: 150
Council:150
Maintenance: 200
Total expenses : 2627/mth -> 31524 per year
IP Cashflow:450x50 – 31524 = -9024

Assumed 50/50 ownership
Income 1: 80k - 4512 = 75488 ->Tax 16192
Income 2: 30k -4512 = 25488 -> Tax 2923

Out of pocket per mth
Tax without IP (income 1 + Income 2): 17550+3600 =21150
Tax with IP: 16192+2923 = 19115
Tax Return: 2035 -> 169.6/mth

Out of pocket per month = IP mortgage repayment – rent – tax return = 1927 – 1800 – 169.9 = -42.9

If I have done the calc’s correct above it means that I will be 43 out of pocket per month.

I forgot to add the property management cost to the above
I would really appreciate comments on if the above is close the “reality”.

Thanks,
J

I'm a bit confused. But, let me get this correct, if you go ahead with purchasing the IP ($465K) and also take into consideration the fact that you still owe $380K on your PPOR, the total amount you will owe will be $845K (although you will actually owe more than this as you stated that you haven't added stamp duty, etc to the purchase price of the IP). Yet you will have real estate assets totalling $1.065m ($600K PPOR + $465K IP). Given that the values you provided are correct. Yes?

Then, you need to work out (taking into account your incoming wage - living expenses, and other expenses associated with owning 2 properties (as were outlined by previous posters) whether you can afford it or not.

 

[gottabespotless]

Or do you have $176 000 in cash as the deposit for the IP?

 

[Ed Barton]

ok. I'll have a go with some assumptions..

The IP is post ware house from about 1950’S which was fully renovated 3 yrs ago. I have not included purchasing cost such as stamp duty etc.

OP means to say post war (II).

Our PPOR value: $600k
Loan amount:380k
Equity: 220K

IP Value: $465k
Deposit: 80% of equity = 176k 20% - 93k from LOC on ppor
Loan Amount required :289k 465k
Rent: 450p/w

Monthly expenses:
Interest only repayments at 8%:3100/mth 465k x 8%= 37.2k/12= 3100pm
Strata: 200 why are you paying strata on a house?
Water: 150
Council:150
Maintenance: 200 if it is strata then little maintenance.
Total expenses : 2627/mth -> 31524 per year 3800pm=14076
45600

IP Cashflow:450x50 – 31524 = -9024 31524-45600= 31524 -45600 = 14076

Assumed 50/50 ownership assume 100% ownership
Income 1: 80k - 4512 = 75488 ->Tax 16192 ***. 80kl- 14076 = 64924


Out of pocket per mth
Tax without IP (income 1 + Income 2): 17550+3600 =21150
Tax with IP: 16192+2923 = 19115
Tax Return: 2035 -> 169.6/mth

Out of pocket per month = IP mortgage repayment – rent – tax return = 1927 – 1800 – 169.9 = -42.9

If I have done the calc’s correct above it means that I will be 43 out of pocket per month.

I forgot to add the property management cost to the above
I would really appreciate comments on if the above is close the “reality”.

can't be bothered with anything more.

 

[gottabespotless]

I'm going make a wild assumption here. you've heard people say 'use the equity in your ppor to fund the deposit on an ip'. yes? well it's not free money unfortunately or I'd be a billionaire. the more correct saying would be 'use the equity in your ppor as security for an ip to allow you to purchase it with no savings at 100% of purchase price'.

I think you may have hit the nail on the head there, Ed Barton.

So, Joh, a very easy way (if not a 'rough' way) to work out if it's 'doable' is this;

Current PPOR Mortgage: $380 000
IP Mortgage: $465 000 (although remember to add stamp duty, etc, to this!)
Total Owe: $845 000

Find one of those 'mortgage repayment calculators' that are on most of the bank's websites, and find out what the repayments will be on a mortgage of $845 000 (you can play around with these calculators - see what the repayments will be whether IO or P&I, enter different interest rates, over however many years, etc).

Then, once you've got the repayment figure, be REALLY honest and also add up all of your CURRENT personal living expenses like groceries, petrol, medical expenses, entertainment, electricity, phone, vehicle running costs, PPOR rates, etc (I always look at our last six month's of bank statements for a true indication of our household's expenditure) and add this to the repayment figure to see what your $$$ 'outgoings' will be each week/month, etc.

Current Living Expenses + Mortgage Repayment = Total Expenses

Then, add up all of your income from work, potential rent (minus PM's fee) etc. (Be very conservative with your figures) to get the Total Income expected.


Total Income - Total Expenses = ??? per week/month

The final figure, above, is the money you'll need for things like the IP's rates; strata fees (if applicable); insurances (Landlord's and Building (if a house); unforeseen problems like a tenant notifying you that they need the hot water system replaced; an electrician/plumber had to be called; the oven/dishwasher packs it in; air-con breaks down; or if the tenant is late with their rent; property is left vacant for a considerable time; etc, etc, etc. All these are tax deductible, ofcourse, but you'll still need the money upfront for these things.

Really go through the figures carefully. Investing in property can be wonderful and very financially rewarding and I highly recommend it, but don't go in over your head by aiming too high straight away. Perhaps, if you can't afford this particular IP, you could look at a cheaper one? There's plenty of good buys out there!

Good Luck!

 

[Aaron_C]

Most of the time a good property purchase is based on gut feel. If you have to excel the numbers, make numerous assumptions etc then you might be trying to flog a dead horse

 

[ozsupra]

I'm not sure we have even identified it is a horse!

 

[BuildingBlocks]

I'm not sure we have even identified it is a horse!

It's just a whole bunch of cats taped together.

 

[Kanemicm]

Have you taken into account LMI? Holding costs?